Good day, ladies and gentlemen, and thank you for standing by. And welcome to the First Quarter 2017 Overstock.com Incorporated Earnings Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. I would now like to turn the program over to our host, Robert Hughes. The floor is yours.

Thank you. Good afternoon, and welcome to our First Quarter 2017 Earnings Conference Call. Joining me today are Dr. Patrick Byrne, Founder and CEO; Saum Noursalehi, President of our Retail business; Jonathan Johnson, our Chairman and President of our Medici business; and Seth Moore, Senior Vice President of Analytics. Let me remind you that the following discussion and our responses to your questions reflect management views as of today, May 4, 2017, and may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in the press release filed this afternoon in the Form 10-K we filed on March 3, 2017, and in the Form 10-Q we filed today. Please review the safe harbor statement on Slide 2. During this call, we'll discuss certain non-GAAP financial measures. The slides accompanying this webcast and our filings with the SEC, each posted on our Investor Relations website, contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Patrick, with that, let me turn the call over to you.

Thank you, Rob. This is Patrick Byrne. Today, we have an informative and exciting and, I hope, fruitful earnings call for you. You'll have to follow along on the slide deck carefully, and it's different than the slide decks we've done in the past. So I'll jump right in and I'll call at each slide as I hit in. Slide 3. Our sales growth is down to 5%. A nice op - $51 million of operating cash flow. We have a fine, sustainable business here. I'm going to be going into more details shortly. But let's start with the Retail business, and the Retail business had a 4% increase. It's still growing 4%. Its gross profit is growing nicely, 13%, and it made a $1.4 million. We have a $1.4 million pretax income in the Retail business. We have just fine healthy Retail business. But it's about time. I'm going to do something a bit different now. It is about time that it seems to me there's an elephant in the room, that one could have -- I talked about in the last couple of years. But it's really about time that I have to talk about it directly, and that is Wayfair and Wayfair's effects on the digital marketing landscape and our business, your business. So we'll -- I know I opened the door to somebody saying, "Oh, you're blaming this and that on Wayfair." I'm really -- that's why I have avoided talking about Wayfair for a lot of these several years that they have been coming on. But at this point, I would feel remiss since the point of these calls and these communications, is to inform you, shareholders, about the realities of the business you own. I think at this point, I would be remiss not…

No.

Nothing?

Patrick, I would say it feels like one of our competitors has a model of growth to bankruptcy.

Well, I'm not going to comment on that, but I'm just saying look at Slide 16. You've got a business with $93 million of contribution versus our $200 million and something. In my mind, and I've been telling Wall Street for 15 years, I think that valuing businesses off top line in the Internet doesn't make any sense. I think everyone should be looking at contribution because -- people have all kinds of different ways of calculating their gross margin stuff. But we're -- apples means apples can first be done. They said the contribution number. Anyway, they're actually less than half of our size that way. So the market is valuing what they have at $4 billion and what we have at $400 million. I would much rather own the thing on the left at $400 million than the thing on the right at $4 billion. I actually feel for them. I think that there's no way that they can right -- that they're going to have to cut -- we've been through the kinds of things they're going to have to go through. And I can think of 2 businesses, who have reached this point and made it. And one was us and one was Amazon. And in Amazon's case, they just kept going and they had access to so many billions of capital. And they did actually did just grow their way out of it. In our case, we got to that point, and we got very scientific about managing our expenses and our contribution, as you see on the left. And we kept ourselves profitable. I look at where they are, and I don't think there's any way they can grow themselves out of this. And they're not even close -- as you see -- they're…

As much as we could. And so you'll notice at the bottom of the slide there, in their case, we include customer service and merchant fees directly in our cost of goods sold. They have it on a separate line. So we substract to that to make it apples-to-apples.

Okay. So they show have 2% better margins. Where is that coming from? Here on Slide 22. Spock, do you want to walk through this slide?

Yes. So the $4 billion question, if they're buying scale is, is the scale creating an operating advantage? So you saw, we have about 150 basis points to 200 basis points in gross margin difference. On Slide 22, you can see these are screenshots. The one on the left is from Wayfair's website. The one on the right is from Overstock's website. Products are virtually identical. They have changed the photography a little bit. They have a different name but otherwise virtually identical SKUs. Only the price is much higher. And if you're going to have higher prices, you have to do everything you can to not expose that other people carry the same type of inventory.

They have to decommodify. And so before we go on, I'll mention that a big part of Wayfair's business plan -- this is not a oneoff. This goes on across millions of SKUs. They take SKUs that exist on other people's site. They reintroduce them at a higher price, having changed it. They decommodify them. And one of the reasons they're not scaling is they have a very large team of people who write the copy and take the photos so that as they add more products, they just have to keep scaling -- or they have to keep growing that and that's because a big part of their business model is just decommodifying other peoples' products. So we'll give you some numbers around that. Spock, go ahead.

You can see on page 23, this isn't just an anecdote. We went to a third-party pricing intelligence company and they have hundreds of thousands of products matched between Overstock and Wayfair. And looking at the prices paid on those products on Overstock and Wayfair on any given day, we asked the question, how does it compare if Overstock customers had made their orders on Wayfair? And the answer is they would have paid between 18% and 24% more if our customers had ordered those products they bought from us on Wayfair. You might say, okay, that makes sense. People would buy it with the person who is cheaper. But what about Wayfair's orders? So we asked that same question. We used Wayfair's product reviews as a surrogate for how often people are buying the products, did the same analysis, weighting it off of what we believe people buy on Wayfair. And the answer is that Wayfair customers pay between 7.5% and 12.5% more than they would have paid had they made their Wayfair orders on Overstock instead. So whichever way you look at it, Overstock has a considerable operating advantage on the cost of these products, given that there's only a 1.5% gross margin difference on average but there's anywhere from 7.5% to 24% difference in price paid.

Yes. And this is not to be -- I wouldn't say, it's a function of we're getting necessarily a better deal from the suppliers. This is a function out of what we've done with our supply chain. So these other folks can be charging 10% to 20% more and yet their margins show up as only being 2% higher because of what we have done over the years to squeeze dollars and half dollars and quarters and dimes that we just keep shaving out of our supply chain. And that was a slight -- that was an incredibly arcane difference between these 2 graphs from Spock but you get the point that we're 10% to 20% cheaper than Wayfair. Okay, Slide 25. You see our pretax income versus Wayfair's. Because they have gunned it, so $150 million, $194 million, they've lost -- they've gunned it in Q1 -- they've gunned it. They're just totally wrecking the digital marketing space. But they have gunned their digital marketing spending. And so where -- what I think that does is you will see this -- I understand there are some theories that they're going to be turning around this year and getting profitable by the end of the year. I don't know what people are looking at. I think you're going to be seeing that these numbers just deteriorate. So in closing, on Slide 26. We've walked through what their real business model is. What their real business model is taking products that are widely available, marking them up 10% to 20% and decommodifying them. And that's why they have this huge cost in the -- in merchandising and taking those photos and writing and so forth. It does not -- has not scaled for them. They made -- basically their model is…

Yes. So in addition to the distortion in the market that Patrick described, a lot of this was -- we moved off a third-party platform for one of our largest advertising channels and brought that system in-house. And that took some learnings. There was a lot of testing going on. And during that period, it impacted our top line and bottom line. So a lot of this was the result of testing and bringing that technology in-house, but we really feel, especially in the second half of this year, it's really going to pay off.

Yes, I would -- I think, that is a good summary for a lot of work that's going on. We have really upped the game, I think, in terms of digital marketing and what we're doing internally, including bringing several large systems in-house, places we spend many, many tens of millions of dollars outside the office through we've had third parties helping us. We have built the systems to bring it in-house, and it's going to be costly for the first half of the year and pay in the second half.

Yes, and already, I would say the last month of in March, we saw really positive growth from the in-house platform. So we're really bullish on it.

Yes. It's long overdue. There's so many -- there's like maybe -- there's a lot of money we can strip out by bringing our digital marketing, more of it, in-house. So we've done this many times on many different systems. And we have high confidence in our ability to do this. Slide 30. Our gross margin at 20.1%, I think that's an all-time high for us. It's an all-time in recent memory.

As far as I can remember, yes.

And 11.6% on the contribution. That's -- to me that runs 11.5%, 12% is where it wants to run.

And, again, on the gross margin, that's focusing on technology automation and as well as the friction also in operations, so improving our frictional cost.

Yes, we really have wonderful analysts and developers now focused on aspects of the supply chain that we haven't been able to turn to before, and those are really large amounts, $7 million wins, $4 million wins, things like that, that just in different pockets we can strip out. Okay. Slide 31. And actually, that's what we do year-after-year. I think that's why we're in business and all these other guys have come along like One Kings Lane, like Wayfair, Gilt, Smart Bargains and all these...

Buy.com. And we've had a lot of people that we've outlasted while making money.

Yes, and we -- they've had hundreds of millions or collectively billions of dollars, and we just stick to our knitting and not panic, not chase them. Here on Slide 31, tech and G&A. Let's look at the top thick line first. It's gone from -- tech plus G&A has gone from 11.0% to 11.9% of revenue. That 90 basis points, I want to show you where it is. If you look at the light blue, you see that what we're actually spending on G&A is flat. And it's flat -- it's 5.2% -- 5.2% of sales. What we're spending on tech has gone from 5.8% to 6.7%. So the swelling of 90 basis points has been just where we wanted it to be, has been in technology.

Yes. This is -- yes, I wouldn't change anything here. If anything, maybe invest more in tech. It's really what's enabling us to create sustainable growth.

Yes. And even if you go to the next slide, this doesn't tell you as much as it used to because we have a lot of -- we are stable in our corporate headcount and we're really efficient. We have more and more offices outside of our headquarters. We have the place in Ireland. Now we have a new place in -- 2 new places in Washington, one -- anyway. So we have employees who don't -- and we have a place in [indiscernible], right, or...

[indiscernible]

We have something in North America. We've got, of course, warehouses in Pennsylvania and Kentucky.

So this number may not be as meaningful in an absolute sense, right? It does show that we are staying -- we're not building a big bureaucracy at home. Slide 33, operating cash flow, $51 million. Free cash flow, minus $13 million, but that includes $31 million of -- that went towards the building last year, which we're not doing again. We love the building. We think it's going -- it's been a great investment. And as far as people were always asking about cash flow. So we'll just remind folks that our -- what we have to spend is about $25 million a year now. Rob, do you want to comment on?

In CapEx. So a more normalized CapEx now at the building we've done. We think this year, we will return to about $25 million for IT infrastructure, capitalized software development and other business CapEx.

Right. Slide 34, GAAP inventory turns up to 72. 1,600 on the GMROI. Slide 35, our average order size has really moved. It's up to $195. That's starting to get -- Seth can you think of anyone other than the [indiscernible]? Okay. Do you know where Wayfair is off the top of your head?

No. Wayfair is in the $200 range, I think.

Okay. Well, anyway, that's exceptionally high for an ecommerce site, $195, up $20 in the last year. On the next slide, Slide 36, you see that we're paying $4 more to get an action out of a customer, but we're getting more valuable customers. So collectively on all that, before we move off Retail, I'd say -- you've got a great business. It's so efficient on every measure of efficiency. We are parsimonious with capital. We're parsimonious with our expense dollars. We've got a great business. It has stayed profitable even in the face of having a competitor come along and it was a kamikaze competitor next to us. And for 3 years, we've been watching them distort the market, and I felt like I didn't want to say. It wasn't up to me to say something. But at this point, I feel like the -- an honest explanation of where we are as a business is we're -- our growth is going to stay in single digits, maybe reach double digit, and our earnings -- our Retail operating income is also going to stay in single-digit millions or maybe reach a low double-digit million number as long as we have this competitor in Wayfair doing what they're doing. But I obviously do not think that Wayfair is sustainable. I think that it's actually -- that drama is in the final act of playing out. We've seen this happened with so many people come and go in our history. But just to be candid with you, while that's going on, I think it's really quite an accomplishment that Saum and Spock and the whole team on the Retail side can keep us growing and keep us profitable. And so what I will -- I will set people's expectations. What you…

So let me add a little more color to that. We do remain bullish on PeerNova. The combination of having some committed cash, stock getting out of China and taking a little longer to execute a customer contract, had them in a cash crunch. And they did a down round in which we participated and upped our investment. It was unfortunate. The way the accounting goes for these portfolio companies is when they do a down round, we have to ratch it down and take an impairment charge. When they do up rounds, we don't get the benefit to our bottom line. This is one where they've taken a down round and we expect them to grow and do well in the future.

But we are very proud of this collection of assets under Medici. All of them are blockchain, with the exception of IdentityMind. IdentityMind has got named one of the hottest startups.

One of the top 20 startups of the year. We like our investments in Bitt and Ripio, as they work to bank the unbanked in the Caribbean and in South America. We just had the Bitt team in Salt Lake this week giving us a demo on where their software is. Boy, it's slick. We're really -- we're really excited for both what they'll do to change the world and what their financial prospects will be.

Yes, t0 basically, no question, it is the leading company in the blockchain meets capital markets space. PeerNova, how would you even describe them?

Well, I think that they are now in the capital markets space as they work with some big New York banks in their back offices.

For clients.

Yes.

Bitt is the leading -- kind of well, between Bitt and Ripio, they're the leading companies of, say, blockchain meets central banking, Bitt especially. Factom, how would you...

Factom is involved in land titling and the capital markets. They are -- they have some revenue, but I would -- these -- we must remember these are all startup companies in a very greenfield space. Some are pre-revenue. Some are -- have minor revenue. We are excited about all of them.

Yes. So we had this unfortunate write-down this quarter, but there we are. Okay. Slide 38. You have our ticker symbols. Slide 39, e-mail questions to ir@overstock.

So we've had a number of questions, Patrick. And I'll kind of emcee the questions that have come in. First is, we've had a lot of talk on here about Wayfair. How was our pricing relative to Amazon?

I don't have -- hang on a second. [Audio Gap] We don't -- we believe it's better. We don't have something that -- handy we can say now that would survive SEC's scrutiny. We don't have a precise answer. I'd rather not throw something out.

Okay. We test on this a little bit.

Wait a second, Seth has.

So I can say it's more competitive than not. We actually are in a healthy place where we can beat Amazon on pricing, not by the same kinds of margins by which we beat Wayfair. But on the whole, we do have a net advantage on Amazon on like product.

Okay. We talked about this a little bit in the presentation, but any more thoughts on the free cash flow and what it should look like in 2017 versus 2016? Rob?

Yes, sure I'll take that. So in 2016, our free cash flow had $44 million in CapEx deducted related to the new headquarters. But that being completed at the end of 2016, that goes away for 2017. As we mentioned earlier, I think a reasonable estimate for the ongoing CapEx in 2017 is $25 million a year.

So in terms of an absolute number -- no. Okay. Well, they should do the arithmetic themselves.

So there's a question about sales growth. And particularly, as we lapsed under the improvements that we made during the last year, what kind of sales growth performance should we expect going forward?

I'm going to toss that to Saum with this preface. We have never had such a data-driven -- I feel better about our innovation cycle is really how I should describe it, the innovation cycle that's guiding development in new features and enhancements in our marketing strategies and such. The innovation cycle is so good now and solid and solid players all around. So I feel -- I think that we're going to have -- the first half of this year is going to be -- what you've seen, so far is about right. And then on the second half year, we'd come out of it hard. Saum.

Yes, I think we can do better than what we've done. Really our investments in supply chain and marketing technology are already starting to pay off, as I mentioned, and I think, it will just get better in the second half year.

Yes. We have done -- we have basically taken the time to go back and -- we're doing some things that are maybe years overdue, but by doing them -- they will give us a lot of -- lot of tailwind for several years, and a lot of people figure it out. So I've just never been happier with our marketing team.

Talk about mobile conversion. How are we doing? Do we have thoughts on how we might improve?

Yes, we made a significant effort in Q4 on mobile and our experience there. And it's really paid off. Our conversion is up significantly year-over-year. And there is more wins coming this quarter. So we're seeing great results and there is more coming.

Spock, do you want to comment on mobile?

Yes, we made a considerable headway in mobile and we see that optimization process is really being the future of the business.

Yes. It really is. Last Q4, we -- the world of consumers really switched to shopping for furniture mobile. It's really quite a surprise how much of it has shifted. And we were lagging on our mobile experience compared to what it could be, although we just won awards. Our apps keep winning these awards. Just like the best -- did we just win an award?

Best Android app.

Best Android shopping app.

And an award on our design and user experience on Android.

Yes, but our mobile as opposed to app game has not been as strong as it should be. But they -- that just means they have found, say, in the last 6 months, a lot of holes to plug and a lot of improvements to make. And they are all working.

Right. Next question is, what are we doing to maximize return on our advertising spend? Are we pleased with its efficiency? And in particular, can we talk about the in-house digital platform and what we ought to expect in the second half of the year in operating leverage because of that?

Yes. So as you guys saw our comparison against competitors, our marketing spend runs outside of Amazon, very efficient. But that said, we still think there's a lot of opportunity. And a lot of that is why we're bringing technology in-house and applying really machine learning technology. We're making a big push into machine learning, not just in marketing, but in every department. And we think, it's going to create very efficient spend.

Great. Thank you. A lot of retail brick-and-mortar are going out of business. And it seems to be creating an opportunity to gobble up inventory. What potential, Patrick, do you see to acquire liquidation inventory at deep discounts?

Well, typically, once they -- so there is this carnage in the retail world, 3,000 stores getting shut down this year, last I heard. Typically, by the -- the inventory, once it's in the store's system, it does not come back. It's more efficient for them to just liquidate through the stores. That's what they've learned in the last 10 years. So I don't think you'll see us buying up excess from the stores. But the manufacturers, the supply chains all the way back to Asia get stuffed with excess inventory when this happens. So you may see us -- in my perfect world, we'd step in and buy some -- we'd have an opportunity like on a $25 million electronics buyer or something like that. That's what we're really looking for now, larger closeout buys than we've ever done. And I'm -- I am hoping that this carnage will create some -- every [ put ] makes somebody happy that somewhere in this carnage, those kind of opportunities will bubble up.

Okay. Another question on migrating online, particularly in the home furnishing business. Patrick, do you think this becomes a winner-take-most market? And does that mean it's difficult for Overstock if it remains a niche player? I'm not sure I agree with the assumption that we're a niche player, but I'm just reading the question that's come in.

Interesting. Well, I guess, I have a suspicion that in the eyes of the gods of economics, the right model there waiting for people to discover is, for furniture and home, is brick and click. I -- yet to be proven, what Walmart is doing with Jet is actually quite smart. And I think that, that may -- in the back of my mind is a suspicion that the right model is something and that I now see Wayfair and Jet doing. Spock, do you want to describe what Wayfair and Jet are doing together for -- oh, I'm sorry, Walmart and Jet?

Yes, there is something too from a supply chain standpoint, blending deliveries against the store rather than doing last-mile delivery into a home, and there's a good economic argument for that. And in that regard, there's a benefit in what Walmart and Jet are doing. I wouldn't go so far as to say this category in particular is winner-take-most. If you look, the industry has the sales distributed across a lot of players and has yet to have ever consolidated much in the same way that the apparel industry never consolidated.

But yes, I think that online, though, there might be physical reasons that you wouldn't see it in the brick-and-mortar world that you will see online. I guess I think that -- so I have a suspicion -- a hypothesis that ultimately the best model is what you see Wayfair -- oh, I'm sorry, Walmart doing with Jet. If that's the best model, Amazon is tacking their way towards their -- they have in the last 5 or 6 years gotten a lot of fanfare about opening different kinds of stores. I don't know if any have been a success, but have been -- I have recently been hearing about dozens of furniture stores that they are opening. I heard yesterday that Jeff Bezos said that it was not working as well as planned. But let's say that, that is hypothetically, if that's the best model, where Walmart and Jet have ended up, as that gets explored and manifests itself, then if that's true, then the right thing for both Amazon and us, we will find our way to being some hybrid model like that. And it -- so that's where -- but to me, it remains to be proven whether that is the most efficient model.

Yes, I think you'll see a bigger role of augmented reality in home goods, especially large home goods. And I think that will help a lot of the migration actually of offline to online in the home space. But we'll see how it plays out. But I can see a big role in that.

Remember our category is usual in that only about 10% is migrated online, 10%, 12%, compared to everybody else. So early days, and the right model hasn't been found. And if at the end of the day, the right model is some hybrid, then you will see us, maybe we'll acquire somebody or maybe we end up as the front end of another store that already has brick-and-mortar. But what I -- I feel like the property we are building is we are building the perfect property for such a hybridization someday.

Another question, Patrick, and it's someone who doesn't watch the stock daily. This is a little bit news to me, but one of our shareholders says the stock took a suspicious 10% drop in the 5 minutes before the close today. Do we see any reasons for that?

Yes, I'm actually quite bothered by that. We -- I noticed that too right before the call. It looks like at 3:35 today.

Eastern time.

Eastern time. Our stock started dropping steeply. We give the -- we give the information -- it could have been just somebody shorting into the close or it could have been they were selling into the close. But it's -- I think, that we ought to find -- we gave our press release to 2 groups beforehand. We should probably be calling into them.

Yes, we'll definitely look into it. It's suspicious indeed. Here's an interesting question, Patrick, and you may want to go back and look at Slide 23. The shareholder said thank you for the very strong presentation. It's clear, concise and it's logical. Then the question is, why not use the chart from Slide 23 along with a couple of other compelling facts for a TV ad comparing Overstock and Wayfair?

Well, I think that -- I think, that TV ads that showed charts side by side, they're probably not most compelling. But there may be some other way to dramatize the said facts. Saum?

Well, I don't know if I want to comment. But there is something we're working on that I think will highlight some of this.

Yes, we recognize some of our advantages against Wayfair, and we'd like to help our customers recognize those, too.

Actually, the matter of fact, yes, we'd like -- well said. I can say you are going to see an ad. I'm not going to say where, but you will see an ad calling out pretty much just what you said, shortly.

Okay. Here's some couple of questions on the blockchain business. Can you comment on plans to raise capital directly in the Medici or raising money through Overstock to put into Medici? And I guess, I would say -- I don't think there's any plans to raise money via Overstock to put into Medici, but Medici will begin to look at how to raise money. We've had some unsolicited interests in funding of Medici, and so we think the market is right. We've had some cleanup to do. We like where we are better today than we were 9 months ago. And I think in the second half of the year, that will be one of our goals.

I will mention that in Medici, in t0, there is a new product being introduced and -- being introduced this quarter and even with -- oh, well, okay I'm not going to say anymore. I think it may be an interesting product, but Jonathan does not want to give it.

I think it's an interesting product. Due to the timing is what made me grimace and gave Patrick some pause. But we do have good products coming out of t0. We're pretty excited about the opportunities there.

How are -- and you're excited about this?

Is that, that one that you're thinking about in particular?

Yes, the opportunity on this one, if it caught on is enormous. It's the biggest blockchain product, I think, that's ever been introduced in any industry, is what's getting introduced. Now whether it catches on is a different question.

Which leads to a similar question. What -- have other companies been interested in leveraging the t0 platform to do -- offer digital offerings like Overstock did? And how is that taking off? And I would say we've had a number of companies approached us. They haven't been interested yet in jumping through some of the regulatory hoops that we had -- that Overstock had to jump through to do its digital stock offering. But we are working on making the system more robust so that those regulatory hoops are easier for others to jump through.

Do you want to comment on U.S. versus international interest?

Well, yes, I will say this that international interest seems to be much higher. Also, I have been to Europe 3 times this calendar year. We've had great, great meetings. And I think t0's blockchain sales are more likely to happen abroad first than they are domestically. Another question came in regarding Overstock Series B preferred shares. These are the preferred that are not digital. They are very thinly traded. There's not much liquidity. Has Overstock given any consideration in converting those Series B preferred into common? I think the answer is not yet, but that question will make us look at it and see if it's something that makes sense.

Yes.

Okay. So we take it to do from that question.

Right. And we'll report back later.

To do with -- return and report, absolutely. Tell us about the efforts to ramp up SKUs. How is that going and how many SKUs have we got on the site if you want to give that number?

I don't know if we want to give an exact number, but non-media SKU count has grown significantly and it's...

Why don't you give a number? What is it at the moment?

Hang on. [Audio Gap]

Yes, so for non-media and books, it's up from maybe $1.2 million to $2.2 million. And it is translating to, I think, growth and conversion. But it's going to continue to grow and the team has aggressive plans to continue to grow that, so for the rest of the year.

I think the goal is by the end of the year to get to about $5 million. And you may even see that just the -- just the starting point on a further expansion.

Well, I'd point potential vendors back to the slides. As we say, if you like to be paid quickly, and if you like to do business with someone with the cash to pay, we're the company to talk with. So to what extent is discounting and promoting driving sales? And does that have any impact on gross margin or operating profit?

Our spend there has been in line with previous periods. It's always part of our strategy. But as you saw, our gross margins are as high as I remember. So it's not hurting. We're finding wins in operations too.

What's really helping and helping our partners -- stand by just a moment. [Audio Gap]

Well, I will just say, we will -- I have said for years that we needed to -- well, anyway, I'm not going to comment. We have higher gross margin than Saum remembers, and that's good enough. I think we have a machine that's going to keep squeezing gross margin points out for some time.

Agreed.

Go ahead.

We have another question on the blockchain area. Have you thought about spinning off any of your holdings yet? And what's the status on licensing some of the t0 technology? And I would say, it's too early to spin these off. They're still all at early startup stage and growing, and we think that there's a lot of potential. Each of them have been soliciting investors, and we welcome others to invest in them. As far as licensing the technology at t0, we do think it's a longer sales cycle. But what I said is we've seen interest particularly in Europe and Asia and it's probably a proof of concept to an implementation to a license, which is not a quick sales cycle but something we see very promising.

Yes, and although I will go back and mention that t0 is introducing a product this quarter. Well, okay. There's some wincing going on, but that -- anyway -- but it's a [ cherry ] product.

It's a great product. It may have some regulatory hoops. So I think the technology development will be done this quarter and I'm confident in saying that. It's where we have any regulatory hoops to jump through. What was the rationale behind the latest investments in Factom and Ripio? Ripio is a great company.

Can you say how big the investment was?

In Ripio, we own about 2.5%. They've asked us not to say the dollar amount. We -- it's a company now in South America that's working to have a digital payment system and bank the unbanked. We like their management team. We like technology they have built. It's promising and we think it's going to make money over time. And it's doing something socially really important by banking the unbanked.

It's something like Bitt.

Well, a lot like Bitt, just a different sandbox. And we -- when we see good ideas in different parts of the world, we're not going to say we bet on one player for the entire world. We think both Bitt and Ripio are promising. With Factom, they have a relatively long history for a blockchain company. We've tried a number of things from working on, putting land title to the blockchain, to now focusing on doing back office compliance for mortgage banking to help cut the compliance costs down by putting contracts and other things on the blockchain. We love their management team. And like a lot of startups, they've pivoted from one thing to another. We like where they've pivoted to right now.

But they've stayed within blockchain and they are one of the OG blockchain companies with a great name and good technologists.

Great technologists and have gotten now industry expertise in their management in addition to some great technologists.

One thing I'm going to mention before Jonathan goes on is not only has Jonathan -- actually, if you look at that Medici chart, not only has he done a fantastic job getting all that organized and the companies well formed and all of those things you would expect. But really starting -- but really leading and getting the right leadership into these companies and the right filling in gaps where needed. And also, a big part of this thesis of this investment was there would be some synergy possible by creating -- well, Jonathan, why don't you explain it?

Well, we think there's great network synergy among the portfolio companies. They are trying to -- many of them are trying to solve different problems with similar or same technology. And so getting them together, we think, accelerates it. So we are holding a Medici ventures blockchain summit and getting our teams together to figure out how to work better. We have a team of 20 developers that we [indiscernible] out to these different portfolio companies. These are experts in blockchain development, and they help accelerate the advancement of these portfolio companies. So our human capital is augmenting the venture capital, what we have invested into.

Yes. And that is, we've had one such meeting already, and it is the case that people find -- there's a lot of synergy between -- or among these companies.

Talk to us about the sales trends for Club O members. Are we happy with the program? Are we thinking of any further refinements?

Yes, the performance is improving and memberships are growing. So I have been happy with that. We're exploring a premium tier and working on that. I don't know if we want to share it.

No, we don't want to share. But I'd say, we're not exploring; we're designing. I'd say this is the year where we're designing a premium tier.

Okay. We've got a number of other questions. We're hitting the hour. Do we want to hit just a few more questions?

Why don't we go to [ 20 ] of? That gives us like 8 more minutes.

Okay. Do you want to talk about international sales? How do they look?

Sure. International.

How would you predict them 1, 5 and 10 years out, which is maybe impossible?

International has always been really underperforming for us. It barely has gotten off the ground. It's barely been 2% of our sales in the past. It is now growing. It's got good leadership at the helm. It's got good leadership at each of the stations. And it's grown 36% now, I think and I think may really be on the edge of taking a stair step up this year. Would you -- yes, I think that you could see it. I mean, what is -- I think, that you could see it have a real run for several years and start becoming a significant part of sales.

How about social networks to drive sales? Any update on what we're doing there? I know a social media seems to be the Holy Grail.

Yes, we identified some areas in social where we were underinvesting and have really ramped up spend. And so we're measuring and running a bunch of A/B tests, and I think it's going to pay off long term. But we -- anyway.

In fact, I'd say, dramatically underspending, maybe spending a quarter where fit as much as we should have been spending. And so we have funded a big experiment that's going on now, and a lot of social media spending. And I'd even say this quarter we'll have results both on the top line. And also because we are spending a fair amount or spending a lot in a sort of exploratory way, which is never as efficient as you do that reconnaissance.

Well, there are 2 questions, one on the blockchain and one back to Retail. What have we seen on the regulatory front, particularly with the new administration in Washington? It's helping to advance or destroy the blockchain business? And I would say, one positive thing we've seen in Washington is the Office of the Comptroller of the Currency is talking about creating a single nationwide money service business license, which will allow companies like Bitt and Ripio to do business in the United States without registering in each of the 50 states. I would say that D.C. seems to be -- Washington seems to be behind the curve internationally. As I've gone and visited with other countries including the European Central Bank. It's as if -- it's as if the U.S. government doesn't get the joke on this. And they -- and it's a classic example of the incumbent not understanding it will be disintermediated by new technology.

Yes, I think this technology is going to be a shift bigger than the Internet and the U.S. is going to regulate itself into second-tier status in the new world.

And last question, and I'll use this as the last because I like the preamble. Your sales per employee are amazing, especially with compared to other retailers like Target and Walmart. What is the key to our success?

We are efficient. We are all about efficiencies. And we never rest. We find -- we turn the key and find the whole new world of efficiencies, and we're going to sweep it all up. And then we turn another key and find there's an even bigger, bigger world beyond it.

Agreed. A lean entrepreneurial team.

Yes. Saum has brought -- Saum was the greatest developer we ever had. Got more done with fewer assets, fewer resources than anybody. And really the pioneer of bringing agile development techniques into the company. And really what we've done is we've gone agile. We've made as much of the whole corporation go to agile now and lean startup kind of thinking as we could. And we're actually going to move even more that -- further that way next year.

Great. Well, we appreciate our shareholders being owners. We're trying to do the best that we can with your trust and your capital. We're going to go back to work.

I feel great where things are. I'm sorry we've got this competitor who is blowing himself up. And that while that's going on, what we're going to do is just stick to our old-fashioned chunky-to-chunk business, making some money until this season passes too. Saum?

I think we have a strategy, and we're going to stick to it until, yes, this competitor burns up.

And we'd remind our shareholders that we're having our Annual Shareholder Meeting next Tuesday, at 1:00 o'clock Mountain time. You can join us here in Salt Lake at Peace Coliseum or participate remotely. And if you haven't voted your proxy statement, please do so. We will see you then.

Thank you.

Thank you.

Thank you, presenters. And ladies and gentlemen, this will conclude our conference. Thank you for your participation, and have a wonderful day. You may now all disconnect.